Coverage Barred for Portion of Settlements for Long Term Care Insurer’s Alleged Misrepresentations to Policyholders that Constitute the Return of Premiums
In a case in which Wiley represented one of the insurers, the Delaware Superior Court, applying Virginia law, has held that an exclusion in professional liability policies issued to an insurance company barring coverage for amounts that constitute the return of premiums applied to settlement amounts paid to long-term care policyholders that were calculated based on artificially inflated premiums paid by those policyholders, but not for settlement amounts that represented only compensation for inadequate disclosures to the insured’s policyholders. Genworth Fin. Inc., v. AIG Specialty Ins. Co., 2025 WL 688987 (Del. Sup. Ct. Feb. 21, 2025).
After obtaining regulatory approval to increase premiums on long term care policies (“LTC Policies”), the insured provided policyholders with three options: (1) pay the increased premiums to continue full coverage; (2) pay the then-current premium for reduced coverage; or (3) enter “Non-Forfeiture Status” (“NFS”) and cease paying premiums while retaining a fixed amount of coverage. Policyholders filed multiple class action lawsuits against the insured alleging that the insured failed to make adequate disclosures regarding the premium increases, thereby inducing policyholders to make renewal elections they otherwise would not have made. Under the settlements of the underlying actions, policyholders who were still making premium payments on their LTC Policies could elect either a Paid-Up Benefits Option (“PBO”) or a Reduced Benefits Option (“RBO”), with individual settlement payments based on premiums paid and the option selected. Policyholders who were already in NFS status when the class actions were filed received lower lump-sum payouts.
The insurers denied coverage for the underlying settlements based in part on the professional liability policies’ exclusion barring coverage for loss that “constitutes . . . premiums, return premiums or commissions[.]” Coverage litigation ensured.
Reviewing cross motions for summary judgement, the court held that the “premiums exclusion” barred coverage for the RBO and PBO settlement payments but not for the NFS settlement payments. The court underscored that the use of the word “constitutes” in the exclusion meant that the exclusion should be construed based on the terms of the settlements rather than what the policyholders sought to recover in the underlying complaints. The court determined that the settlement payments to NFS class members did not constitute the return of premiums because they were flat awards made without reference to premiums paid. The court noted this was consistent with the fact that NSF class members had ceased making premium payments without additional disclosures before the underlying suits were filed and thus were not harmed by the inflated premium amounts. In contrast, the court held that settlement payments to the PBO and RBO class members were generally calculated based on premiums paid by those policyholders and thus were designed to compensate them for the inflated premiums paid due to the Insured’s nondisclosure. Finally, the court found there was a genuine issue of material fact regarding the proper allocation of the award of class counsel fees in the underlying settlements between the NFS payments and the PBO and RBO payments, and thus what portion of the fee award may be excluded from coverage based on the premiums exclusion.
